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February 5, 2006
THE FORMATION, TRANSFORMATION, AND DEFORMATION OF
TRADING STATES:
LIBERALIZATION AND STATE INSTITUTIONAL CHANGE SINCE 1947
A Prospectus
Richard H. Steinberg
UCLA School of Law
Stanford Division of International, Comparative & Area Studies
[email protected]
General Argument
Several analysts have observed that the form of the state seems to be converging
across countries. Some attribute this institutional isomorphism to sociological processes:
rulers and elites are following "scripts of modernity" that suggest what it means to be a
contemporary state. The result is that many state structures in the developing world
resemble developed country states, but they are "hollow" in that they lack the capacity to
perform the functions that are associated with that structure in the developed world.
Another view of state change and institutional isomorphism, based on material
forces rather than sociological microprocesses, can be found in the history of empires.
Imperial powers have attempted to impose-- by conquest or coercion-- some elements of
institutional isomorphism on subject territories. This is not to suggest that sophisticated
empires disallowed differences in state structure in the periphery. But a large degree of
institutional uniformity in the state has been imposed on subject territories-- whether by
Rome, Napoleon, or England-- for a combination of normative and functional reasons.
How have the elements of the state associated with international trade (hereafter,
"the trading state") transformed and converged in the contemporary postwar period?
A popular view is that liberalization is weakening the state. This position may be
traced at least as far back as David Ricardo's Principles of Political Economy and
Taxation and there are several contemporary versions, notably Charles Kindleberger's
work on the internationalization of American business, and much of the globalization and
governance literature (particularly economic arguments that international trade
liberalization is shifting authority from the state to both substate and supranational
levels)-- all of which have spilled over into the law literature. These arguments often rest
on a market efficiency rationale for reduced state intervention and the consequent
competitive pressure on states to shrink. These arguments also tend to assume (expressly
or implicitly) that liberalization is taking an ideal form prescribed by classical economics.
Empirically, since the early 1990s, many have focused on the transformation of state-led
and formerly centrally planned economies.
While trade liberalization has favored the transformation of state-led and formerly
centrally planned economies, and many elements of the trading state appear to be
converging over the past 50 years, changes in the state are not fully explained by
liberalization in the abstract. The conventional story about the trading state needs to take
into account the distinctive institutional form and process of contemporary liberalization
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(i.e., the evolving nature of embedded liberalism), the role of powerful countries in
applying material pressure on and spreading ideas to weaker countries, and ways in
which state institutions have strengthened. In short, we need a more complete
understanding of the relationship between the contemporary institutions of liberalization
and state institutional change. This project attempts to do that by explaining how the
international institutions of trade liberalization have transformed the state, using material
incentives to pressure developing countries into change, and social processes (especially
"technical assistance") to transform the state in the least developed countries (LDCs).
The form and content of twentieth century liberalization have been negotiated
between states, primarily powerful ones, creating demands on (and incentives for change
in) the constituent states of the trading system. The United States drafted the GATT 1947
(making some concessions to Britain), establishing a process for and rules about trade
liberalization, but allowing the United States (and all other contracting parties) to
maintain several non-liberal laws and associated state institutions. Moreover, the GATT
1947 rules silently assumed and incentivized certain characteristics about the states that
would accept the agreement; many of those characteristics mirrored U.S. and British state
economic institutions. Hence, when the United States accepted the GATT 1947, it had to
legislate nothing and modify none of its state institutions. Similarly, the agenda-setting
that led to the WTO Agreements was dominated by Washington and Brussels,
establishing agreements that demanded relatively little legal or institutional change in the
EC or the United States.
Yet for most other countries, the procedural and substantive requirements of
joining and participating in the GATT/WTO, and the opportunities and incentives created
by the regime, have required or favored substantial change in state institutions. The
GATT/WTO has simultaneously favored diminished state intervention in the domestic
economy in some countries (particularly in previously centrally planned and state-led
economies) and at the same time reinvigorated the state in many ways. Taken together,
these changes suggest convergence towards some aspects of U.S. and Western European
models of the state. The demands on state institutions acceding to the GATT/WTO
system have increased over time as liberalization has deepened (as illustrated by a simple
comparison of the 1955 GATT Model Protocol of Accession with contemporary
protocols). A similar story may be told about state institutional change demanded of the
"new European" countries joining the EC/EU and accepting the acquis communitaire,
and for Mexico's acceptance of NAFTA.
Finally, the process and demands of negotiating successive rounds of deepening
liberalization have created incentives for institutional transformation in powerful
countries. For example, as the universe of policies subject to trade negotiations has
expanded with deeper liberalization, authority over those policies has become more
centralized within states and the EC/EU (i.e., from sub-federal levels to the central
government, and from several non-trade ministries to trade ministries).
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State Changes Favored By the World's Main Trade Regime
The contemporary form of trade liberalization has facilitated a boundedconvergent transformation of the state along five dimensions. [As explained in the next
section, the extent of change along each dimension in a particular country depends
largely on certain national attributes.]
1. Reduced Role for State-Led and Central Planning Institutions. GATT/WTO
trade liberalization, and the trade and investment diversion suffered or feared by those
countries outside the GATT/WTO system, have favored reducing the state's direct role in
domestic economic planning-- central planning, state trading enterprise systems, stateowned enterprises, and state-led capitalism.
2. Elements of New State Capacity. At the same time, the GATT/WTO: (1)
expressly permits, employs, and disciplines increased regulatory capacity over sectors
once controlled by-- and fallout from-- dismantled state trading and state-owned
enterprises (especially over competition, financial services, telecoms, labor policies, etc.);
(2) provides opportunities (that combine with strategic trade goals to become incentives)
for strategic trade institutions that can administer anti-dumping, countervailing duty, and
safeguards laws, technology policy (but not industrial policy), export promotion capacity,
and technical standards and testing; (3) requires (or is moving towards requiring) the
establishment and maintenance of state institutions supporting intellectual property
rights, environmental protection, and labor rights; and (5) favors the establishment of
capacity for addressing internal spillovers from liberalization-- internal revenue
generation (to replace revenue previously generated from duties), a social safety net that
can address dislocations associated with liberalization, and more technical standards and
testing (to protect consumers, workers, and the internal environment from damage from
imported goods). [NAFTA demanded even more exaggerated changes in Mexico. In the
EC/EU, much of this capacity has been established regionally.]
3. Shifts of Authority. The GATT/WTO has required or created incentives for
shifts of authority within the state. While formerly state-led and central planning systems
have experienced diminished state authority over the economy, in other countries
authority over the economy has in some ways become more concentrated in the state: (1)
in federal systems, from sub-federal levels to the central government (so the state can
negotiate with a single voice and comply with international obligations); (2) in
presidential systems, from the legislative to the executive branch, so the executive can
bargain credibly and secretly (e.g., in the United States, broader congressional delegation
to the executive branch to negotiate trade-related matters and to impose trade sanctions);
and (3) to trade ministries from other ministries-- or to the external affairs division of
trade and industry ministries-- as previous "non-trade" topics, such as intellectual
property, environment, labor, etc. have become trade topics.
4. Changes in National Policy-Making Processes. Transformation of national
processes of policy-making has accompanied shifts in capacity and the concentration of
authority. The institutions of trade policy-making have adapted so that broader sets of
interests can feed into the new locus of trade policy authority, and so that institutions
previously at the center of non-trade policy-making processes can participate in the new
and expanded trade policy processes.
5. National Legal System Changes. The process and outcomes of GATT/WTO
trade liberalization have favored and been accompanied by: (a) an expansion in
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constitutionally acceptable forms of international agreements (e.g., in the U.S., creation
of the congressional-executive agreement with ex ante approval, to prevent international
bargains from unraveling); (b) an explosion in the number and proportion of international
agreements concluded by an exchange of letters (executive agreements in the United
States) and effectuated domestically solely through executive action; and (c) marginal
increased rule of law along some dimensions-- formalization, transparency, and
independent judicial review (e.g., all are required by GATT articles, TRIPs, and
accession agreements).
State Change in National Context
The extent of change along each dimension depends on a country's starting
point— in particular, its level of economic development, the extent and form of state
intervention in the economy prior to institutional adjustment, whether it has enough
market power to help set the global trade agenda, and whether the country is participating
in a preferential trade agreement with a powerful country. Of course, the trade regime’s
pressure on states to adapt in a functional manner is mediated by particular national
histories and strategic choices. Empirically, the extent and nature of state institutional
change clusters into the following three categories of national economic systems, listed in
ascending order of change—from those country-types experiencing the least state
institutional change to those experiencing the most.
Least Developed Countries (LDCs): Deformation. State institutional change
associated with trade regime demands has been most incomplete in LDCs. In the world’s
poorest countries, exemplified by Bolivia, the Congo, Lesotho, and Mozambique, there
has been little institutional shift associated with GATT/WTO liberalization across any of
the five dimensions, largely because for most of the last fifty years the demands of the
GATT/WTO system have been formally suspended or simply not enforced for LDCs.
Their markets are small: why would powerful states waste resources on developing the
institutional capacity of LDCs to engage in the trading system? Moreover, in most
LDCs, state institutional capacity and political authority structures have not reached a
threshold at which trade regime demands would have any meaning. Until five or six
years ago, the LDCs were left for dead.
In the last few years, particularly since the war on terror has reveled some of the
security consequences of fragile and failed states, the underdevelopment of the trading
state in LDCS has been discovered. The United States, the European Union (EU), the
United Kingdom, Australia, Japan, the WTO, the Bank, and the Fund have launched or
dramatically increased support for technical assistance or trade capacity-building for
states in LDCs. However, in almost all cases, the assistance has been limited to training
bureaucrats in LDCs how to build domestic state structures that would facilitate opening
their markets-- and has expressly and intentionally excluded training about how to
regulate trade (e.g., there is very little training about how to establish and operate
capacity to administer antidumping duties, countervailing measures, safeguards actions,
dispute settlement claims, etc.).
The results are pathological. Many LDCs lack a functional trading state. To the
extent that LDCs are forming trading state capacity as a result of technical assistance,
they are developing the capacity to participate only in the liberal aspects of the regime--
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not in the regulatory activities that have proven so crucial to maintaining a coalition of
support for the GATT/WTO system in the United States and Europe for over fifty years.
Advanced Industrial Countries: Transformation. The market size of the United
States, and the EC/EU since the early 1970s, has enabled the transatlantic powers to drive
the development of GATT/WTO rules. Hence, the external trade-related impetus for
institutional transformation in these states/entities has not been the substance of
GATT/WTO obligations, but rather the exigencies of the GATT/WTO bargaining
process, the strategic and tactical advantages of establishing a particular trade bargaining
tool set, and the expanding scope of trade negotiations. And the political vehicle for
change has not been external pressure to comply with GATT/WTO obligations, but rather
economic internationalists within the state and interest groups newly drawn into trade
policy by economic spillovers from deepening integration. In short, these states and the
EC/EU have reorganized to effectively govern world trade, to manage their own
preferential arrangements, and to compete with each other.
In many market-oriented advanced industrial countries, such as the United States,
the world trading system has demanded state institutional change primarily along two
dimensions: trade negotiations have favored shifts of authority (e.g., toward trade
ministries in the central government) and changes in policy-making processes.
Within the EC/EU, there has been change along three dimensions: authority has
shifted toward a single site so that the EC/EU could participate in agenda-setting at the
GATT/WTO and in negotiations with third countries; new state capacity developed at the
EC level so that the Commission could have a full trade bargaining tool set (e.g.,
antidumping, countervailing duty, and competition law and administration); and the
foregoing demanded changes in processes of trade policy-making at the EC-level.
In state-led advanced industrial countries, the global trading system has favored
not only shifts of authority and changes in trade policy-making processes, but also a
reduced role in industrial policy and-- in some cases—new state capacities. Both France
and Japan were in many ways similar state-led economies prior to 1983. Since then,
France has shifted into the Western advanced industrial model as it has been able to build
state capacity to provide a safety net that catches social dislocation associated with
adjustment away from a state-led economy. In contrast, Japan has not substantially
expanded such capacity and has not succeeded at substantially reducing the role of the
state in the economy, although the process of transformation there may still be underway.
Developing Countries: Formation and Transformation. As suggested above, the
opportunities and incentives embodied in the GATT/WTO agreements have precipitated
change along all five dimensions in developing countries. These countries may be
analyzed as in three groups: those that previously followed import substitution
industrialization policies (e.g., Mexico, Brazil, Argentina, India), those that were state-led
(e.g., Indonesia, Malaysia, Korea), and transitional countries (e.g., China, Russia).
Unlike the LDCs, these states have not experienced continuous suspended application of
GATT/WTO rules. Their markets or exports have been substantial enough to attract
EC/EU or U.S. interest in applying GATT/WTO rules, which have demanded state
institutional change.
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Conclusion: Bounded Convergence Toward the "Trading State"
Since the middle of the Twentieth Century, international trade law and bargaining
over the substance of that law have played a transformative role, helping define evolution
of the form of the state. With each increment of deeper postwar liberalization, most
states have been transforming and converging subtly along various dimensions towards a
U.S.-European-influenced ideal-type: the trading state. Increasingly, international trade
law and trading states reflect each other. Rather than dissipating the structure of the state,
the legalized world trading system is reinforcing, reinventing, and replicating the U.S.European model of the trading state. Hence, the formation of trading states may be seen
as Waltz's second image mirrored: U.S. and European state structures are reflected in
GATT/WTO rules, which have been molding the structure of other states.
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